Macroeconomic impact of implementation of vat in Odisha
PREPARED & SUBMITTED BY
MR. SAGAR NAYAK
Value added tax (VAT) is a type of indirect tax that is imposed on goods and services. A question that arises is whether value added tax has been a boon or misery for a developing country like India. Around 136 countries in Asia have recognized the importance of value added tax. In one of the most large scale reforms of the country’s public finances in over the past 50 years, India has finally agreed the launch of its much delayed value added tax from 1st April, 2005 at a rate varied from 1% to 12.5%. The tax rate is fixed by meeting of different state level Finance Minister, in New Delhi, designed to make accounting more transparent, to cut short trade barriers and boost tax revenues.
THE MECHANISIM OF VALUE ADDED TAX
Value Added Tax (VAT) means the tax which is payable only on value-added. It is multi-point tax system but without the effect of double taxation. Value is added to the products, which an
organization buys from other organizations such as raw materials, partly finished goods etc. After buying the organization applies its own labor and machine to manufacture the final products. VAT is a tax, which is imposed at every stage of production i.e.., from production level to retail level. Under VAT tax is calculated on value Added where value added is the difference between sales value and purchase value.
“A government should
tax its people like a
shepherd shears a flock
or a bee gets nectar from
a flower” -Chanakya
• SELLING PRICE WITH VAT @10%=110
• TAX TO BE PAID BY A =10
• BUYING PRICE WITH OUT TAX(100)+PROFIT ON PROCESS(50)=150 • SELLING PRICE WITH VAT @10% =165
• TAX TO BE PAID BY B =15-10(ALREADY PAID BY A)=5
• BUYING PRICE WITH OUT TAX(150)+PROFIT ON PROCESS(40)=190 • SELLING PRICE WITH VAT @10% =209
• TAX TO BE PAID BY C =19-15(ALREADY PAID BY A+B)=4
TOTAL TAX PAID UNDER VAT IS 19 UNITS WHILE GOING BY OLD SALES TAX IT WOULD HAVE 48 UNITS.
BACKGROUND OF VAT SYSTEM IN INDIA
Indirect tax system plays an important role in the economic development of a country by influencing the rate of production and consumption. The Government of India has after committing to the World Trade Organization (WTO) regime, decided to modernize and streamline its indirect taxation, in the light of the experience of other WTO member countries. Initially, all states were to move to VAT system by 2000, but administrative problems and concern over the revenue implications of the change delayed the scheduled implementation. It was postponed five times before implementation. In fact, introduction of a full fledged VAT in India seem to present numerous administrative and constitutional difficulties, including the vexed question of Union-State relations. In addition to this, implementing VAT in India in context of economic reforms has paradoxical dimensions. On one hand economic reforms have led to more decentralization of expenditure responsibilities which in turn demands more decentralization of revenue raising powers if fiscal accountability is to be maintained. But on the other hand, the process of implementation of VAT could have lead not only to revenue loss for the states but can also steal away the states‟ autonomy indicating more centralization. Thus, there was a need to develop such a „Federal Friendly Model of VAT (along with a suitable compensation package) that can be implemented in India without compromising federal principles. The original dateline for implementation for VAT in India was 1st April, 2003. But this could not be met since the states had not brought the required legislation. So finally VAT was implemented in 22 states from 1st April 2005.
12.5% RATE: It would be applied to all
commodities (about 425 items)
4% RATE: Basic Necessities, Capital
Goods, Industrial and Agricultural